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Canadian Dollar Strength Conspires with Brexit Jitters to Drive GBP/CAD Slide into Weekend

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  • GBP/CAD spot rate at time of writing: 1.7327
  • Bank transfer rate (indicative guide): 1.6721-1.6842
  • FX specialist providers (indicative guide): 1.7067-1.7171
  • More information on FX specialist rates here 

The Pound-to-Canadian Dollar rate more than unwound the last of its gains for the week on Friday as the strength of the Loonie collided with Brexit-inspired weakness in Sterling, although with the clock running down rapidly the risk in the short-term could be that the Pound weakens further before any recovery.

Canada's Dollar advanced on all majors except Norway's Krone and Australia's Dollar as an upbeat mood and bid for risk assets prevailed across markets, although its gains over the Pound were the most notable.

"The correlation between the performance of G10 FX rates and developed market equities has continued to strengthen. The strongest correlations are for CAD and AUD which have risen back to their highest levels since late July," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "CAD and NOK have become more correlated with the price of oil. It is the highest oil price correlation for CAD since the summer."

Friday's gains helped the Loonie pare what were in many cases declines for an otherwise soft week, while for Sterling the opposite applies with explosive gains to open the week having been followed by steady declines since. 

The ticking Brexit clock is the root of nascent losses in the Pound with "important differences" keeping the two sides from an agreement after London was reported to have batted away a "derisory" EU proposal on fisheries access.

"The GBP is the among the few major currencies losing ground against the dollar through the overnight session as both sides of the English channel express doubts over the possibility of a trade agreement between the UK and the EU as negotiators prepare for talks over the weekend—with time running out," says Shaun Osborne, chief FX strategist at Scotiabank. "Ultimately, we believe a full-fledged agreement is a remote possibility and see the GBP underperforming through year-end."

Above: Canadian Dollar performance on Friday. Source: Pound Sterling Live.

Deadlock and the resulting losses come just weeks away from the December European Council summit that's thought to mark the last opportunity to have any agreement signed off in time for it to be ratified by year-end, although the talks are set to continue in London on Saturday.

"Some people are asking me why we are still talking. My answer is that it's my job to do my utmost to see if the conditions for a deal exist. It is late, but a deal is still possible, and I will continue to talk until it's clear that it isn’t. But for a deal to be possible it must fully respect UK sovereignty," says David Frost. "That is not just a word - it has practical consequences. That includes: controlling our borders; deciding ourselves on a robust and principled subsidy control system; and controlling our fishing waters."

"Our central case scenario remains a deal being brokered before month end, notably ahead of the final scheduled EU Parliament session of the year, from December 14-17. However, a deal is not the end of the process. Rapid ratification, within necessary protocols, risks becoming a concern," says Jeremy Stretch, head of FX strategy at CIBC Capital Markets, who sees GBP/CAD at 1.73 by the end of 2020 and 1.80 in 2021. "Post-Brexit headwinds, as the ease of doing business is undermined by costly and time consuming customs checks, allied to the perpetuation of low productivity and weak business investment, suggests that any post-deal GBP rallies will prove short-lived."

Above: Pound-to-Canadian Dollar rate at daily intervals with Fibonacci retracements of September fall & 200-day average.

European demands for so-called level playing field terms around state aid, environmental regulation and taxes as well as other non-environmental taxes have been key roadblocks in the talks throughout, although fisheries have been the subject of most recent statements. 

Prime Minister Boris Johnson reiterated on Friday sentiments already expressed on Wednesday he said "our position on fish hasn't changed. We'll only be able to make progress if the EU accepts the reality that we must be able to control access to our waters."

Meanwhile, Michel Barnier was reported to have called a meeting between EU envoys on fisheries for Monday. This was after European Commission chief Ursula von der Leyen said on Wednesday that "genuine progress" had been achieved in the negotiations but that the risk of failure remained. "In the discussions about state aid, we still have serious issues, for instance when it comes to enforcement," she told the European parliament.

"We argue much of the uncertainty premium has been priced out of GBP. It's actually expensive on Brexit-proxy indicators. Furthermore, GBP scores poorly on a mix of short-term valuation and growth, where relative mobility trends point to another run below 1.30 in GBPUSD," says Mark McCormick, global head of FX strategy at TD Securities. "As a result, the implication is that the market would likely pivot quite quickly from the lively Brexit narrative to the quite negative COVID-induced-growth slowdown one." 

GBP/CAD would decline to 1.6900 if GBP/USD fell back to 1.30 while USD/CAD held Friday's matching 1.30 level. It would take a USD/CAD rally back to 1.33 in order to prevent GBP/CAD declining below Friday's 1.73 in a market where GBP/USD was on the back foot and quoted near 1.30.

Above: Pound-to-Canadian Dollar rate at weekly intervals with selected moving-averages.

  

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